Certificates may be better marketing option

Congress again passed legislation raising the payment limit on loan deficiency payments from $75,000 to $150,000 per “person.” That will be critically important if loan deficiency payments continue to rise as cotton prices decline into harvest.

With the marketing loan gain or LDP calculated at 22.40 cents per pound on Aug. 16, most producers hit the $150,000 payment limit with about 1,400 bales or on less than 700 acres given the prospects for this year’s crop. If cotton prices decline into the 20s, as some anticipate, growers reach the limit even faster.

There’s another catch. While the emergency assistance legislation signed by President Bush doubles the payment limit on marketing loan gains, it does not provide for LDPs on cotton grown on non-base acres.

The latter was in the Senate version of the emergency assistance legislation, but the Senate never voted on its bill because the House had already departed Washington for the August District Work Period. Senators were left with voting on the House version or having to explain to farmers why they did not receive a supplemental AMTA payment.

With so many farmers planting cotton on “non-traditional” acres this year, the inability to receive a LDP on those fields could be devastating.

While that issue may not be resolved until Congress returns from recess, some believe farmers should plan to place their cotton in the CCC loan and redeem it at the adjusted world price or AWP using marketing certificates or “certs” rather than automatically applying for an LDP.

While that may seem complicated, Farm Service Agency staff members say the process is relatively simple: A farmer purchases certificates from his county FSA office at the AWP and uses them to buy his cotton out of the loan, again at the AWP.

Or, the grower can execute his option to purchase contract for cotton in the loan, allowing the merchant to use marketing certificates to steer clear of problems with the payment limit.

“Of course, farmers and merchants need to make sure that the language in their contract does not destroy the farmer’s beneficial interest in the crop prior to the cotton being placed in the loan or redeemed,” said an FSA staffer. “That has been true for many years, with or without certs.”

Of course, if cotton prices surprise the experts and begin rising toward the CCC loan rate, the pressure would be off producers and merchants to use marketing certificates or LDPs to trade cotton.

But few analysts expect significant improvement in prices given the now almost foregone conclusion that U.S. farmers will harvest more than 20 million bales and the slowdown that appears to be occurring in most of the major economies.

Instead, farmers could easily be looking at even higher marketing loan gains than 22 cents per pound as they harvest their crop. The downside is that the growing expenditures for LDPs and marketing certificates will be occurring at the same time Congress is debating a new farm bill.